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Skill Versus Luck: What If All The Key Success Factors You Think Matter Actually Don't?

This article is more than 9 years old.

[Disclosure: Author was long YHOO at time of writing.]

Last night, Twitter disappointed analyst earnings expectations. The stock is off 13% as I write this.

When I got up this morning, I saw a tweet sent out by Twitter CEO Dick Costolo at 3:30am Pacific Time.  He had just watched a 1 hour video on YouTube of Credit Suisse Banker and Columbia Business School Adjunct Professor Michael Mauboussin talking at Google about his new book The Success Equation.

The subtitle is “Untangling skill and luck in business, sports, and investing.”

The YouTube clip is here.

It’s a great talk about the role that skill and luck play in our lives both from a career development, company management, and investing perspective.

During part of the conversation, he mentions an academic study in which the researchers combed through dozens of management books from the past 30 years (including “Good To Great” and “Built To Last”) and followed up on the companies which were glowingly profiled in them.  The authors found that – years later – 88% of them had fallen on hard times.

Yet, at the time of their being profiled, the book authors had studied their management techniques and held up what they thought were “key success factors” for other companies to emulate.  But, it turned out that those were not the reasons for the companies’ success.  And, there was no benefit to others gained from copying the so-called success factors.

Instead, what the authors found is that the vast majority of these companies experienced a strong “reversion to the mean” following their profile in these books.

The CEOs and management teams (and book authors – and readers!) had assumed that the companies were successful due to the skill of the people leading the company.  Mauboussin points out that it was also likely more due to the aid of some “lucky breaks” along the way which set the company on a path for outsized success.

The company’s success was not predetermined.  And management certainly worked hard to achieve success throughout the process – and they certainly had skills to do a competent job.  Yet, the point was that luck played an indisputable part of the success and only competence (rather than brilliance) was required to steer the company to enormous profits after those breaks occurred.

More interestingly, Mauboussin discusses our strong human desire to, when after having achieved success, attribute that success to our own skill and downplay the elements of luck involved in that positive outcome occurring.  This is basic social psychology – and yet we have such a strong desire not to recognize it in ourselves.

At the end of the 40 minute talk, Mauboussin opened it up for about 25 minutes of Q&A.  Google employees peppered him with questions – mostly about how to spot an investor whose track record is based on skill and not luck.

What I found fascinating is that no Google employee ever asked Mauboussin whether Google’s success was based less on skill and more on luck.  Please understand, I’m not trying to suggest Google’s founders or employees are not skillful and “just lucky.”  That would be preposterous to argue.  Clearly, when Google was founded in 1999, they built a better mousetrap in search than anyone else – even though the consensus view was that “search was over.”  PageRank was demonstrably better.

But the business world is filled with examples of better products which simply never got adopted due to many other reasons.

The key moment for Google to transform from an ordinary company to an extraordinary one was when they bought a company called Applied Semantics in 2003.  That company became known within Google as AdSense and is became responsible for 99% of Google’s revenues.

Suddenly, better search was matched with great revenue generation potential.

Google’s done a lot of stuff since then of course.  They bought Android for peanuts in 2005.  They bought YouTube in 2006 for $1.5 billion.  Later, they bought DoubleClick.  They’ve built driverless cars, they’ve built Google Glass, and they’ve built balloons which can transmit wifi to earth in remote areas.

Yet, today they still make most of their money from search and AdSense.

What if they hadn’t bought Applied Semantics in 2003?  Conversely, what if Yahoo had bought them instead of Overture?  What if Mark Zuckerberg had followed through on his handshake deal with Dan Rosensweig in 2006 to sell Facebook to Yahoo for $1 billion?

Usually, when I’ve asked these kinds of questions, people wave their hands at me and say something like: “Oh, Google would have figured it out.  They’re so smart.”  Or “Oh, it doesn’t matter if Facebook had sold to Yahoo because Yahoo is so stupid that they would have found a way to screw it up….”

But Mauboussin’s talk, if we’re really being honest with ourselves, says that’s wrong.  It’s not that Larry Page and Sergey Brin are really dumb and Terry Semel – Yahoo’s CEO ten years ago - is really brilliant.  His book is arguing that there’s not that much of a difference between the “skills” of these two companies’ management teams as we might think.

And yet no one in that Q&A session from Google brought up that scary notion.  Instead, Google has wrapped its culture in the notion that IQ is everything.  The hiring process at Google is legendary and has even been depicted in a Hollywood movie.  Google only hires from the most elite schools, from the toughest disciplines, and even then has developed its own interviewing process to select only the best of the best.

Initially, when Larry Page took over as CEO, he turned his nose up at traditional management “best practices” in favor of doing things in a way he thought would work best – “the Google Way.”  It led to a lot of college dorm-style debating in management meetings that later the company realized wasn’t always productive.

Earlier this week, Page reorganized his management team because he wants Google to remain nimble and better able to take advantage of opportunities that come up.  Here’s some of the language Page used to describe his thinking behind the re-org:

“As you age, even when you’re still a teenager like Google, you have to work hard to stay innovative.  Innovation is messy, a disruptive process, and people tend to be more comfortable doing what they’ve always done with a few minor tweaks… So I’m making… changes today to ensure we continue to strive for market-leading excellence and beyond in our existing already hugely successful products while also getting the next generation of big bets off the ground…. Our previous structure with multiple different product areas all reporting to me is relatively unorthodox. In principle that’s good because we are not a conventional company and do not intend to become one. [my emphasis] But it’s hard to scale as many decisions ended up coming through me. Our new approach is a more common structure… scalable, focused and enables fast decision making. That’s what we need right now for Google to stay innovative, maintain our velocity and build truly exceptional products.”

What I find interesting in the comments above is that Page clearly believes that one of the “key success factors” of Google is that it’s not a conventional company.  Presumably he thinks the hiring process and management processes they follow are part of what makes Google successful.

The unsettling notion which Mauboussin’s talk makes one contemplate is: what if all those things which Page believes drive Google’s success matter as much as the “key success factors” in all those “Good To Great” management books did to those 88% of companies which subsequently flopped?  What if a vast majority of Google’s success is due to the Applied Semantics acquisition in 2003?

Of course, we will never know the answer to that.  I’m sure Page would disagree with that conclusion mightily – as would most Google employees.  And that’s exactly why no one in that Q&A session thought to ask Mauboussin about what if Google’s success was built on luck.  It’s scary to really look at yourself in the mirror and contemplate the idea that your success might have been far less had not one or two lucky breaks happened.

For some, they might take the idea that luck played a key role in their success as a message that everything in life is pre-ordained.  It’s hard for any of us to accept the conclusion that our hard work and smarts won’t pay off if we keep working at something.  But I don’t think that’s the conclusion from Mauboussin.

He’s not saying that Google’s employees should believe their efforts today won’t pay off in the future.  He’s saying be humble about what has led to their success.

Similarly, Yahoo employees – to pick a commonly viewed “failure” -- shouldn’t feel like they are destined for failure because of the ways things have gone in the past.  If luck had gone a couple of different ways 10 years ago, we would be reading “Good to Great” books about Terry Semel in the airports we pass through.  Just because luck went a different way, it doesn’t mean he wasn’t smart about the future convergence of media and tech in “premium content” a decade before anyone else.  It doesn’t mean that his bench at Yahoo – Jeff Weiner, Sue Decker, Dan Rosensweig, Mike Murphy, Bradley Horowitz, Qi Lu, Greg Coleman, Toby Coppel, Rich Riley, Gideon Yu, Wenda Millard, Katie Stanton, Stewart Butterfield, Sam Pullara, and others – were any less bright, talented or hard working than anyone at Google at the time.

I think the takeaway from Mauboussin is that it would be as wrong for any of those Yahoo folks to under-estimate their abilities as it would be for the Google folks to over-estimate their abilities.

Mauboussin points out that in 1932, the gap between the winner of the men’s Olympic marathon winner and the guy who came in 20th was 39 minutes.  Now, the gap is about 7 minutes.  The gap in sports and management talent today at the highest levels is also getting narrower and narrower.

Stay hungry, stay foolish – and, by foolish, I mean: stay humble.